Traders and investors in securities, commodities and other items send their buy and sell orders to centralized exchanges seeking the best combination of publicly disclosed price and depth of liquidity. However, liquidity in many markets appears sporadically due to the fact that buy orders and sell orders do not necessarily arrive at the same times, which causes prices to fluctuate in an ongoing search for price-liquidity equilibrium. Also, any sizable order arriving in a centralized market has the potential to change the equilibrium by indicating to participants the presence of a new contender for liquidity and as a result it motivates participants to change their order prices.
Participants who attempt to find liquidity in such an environment tend to use multiple liquidity destinations. Liquidity destinations are generally defined as any kind of transaction marketplaces such as “upstairs” block trading desks, security exchanges, auction forums, and electronic communication networks. Participants also divide their orders over time and by destination into smaller sized pieces to disguise their true size.
Order matching systems are currently offered by various companies and exchanges in association with trading of various trading and financial related instruments to overcome this type of inherent phenomenon in centralized financial securities markets. Order matching systems manage buy/sell orders to find the best combination of publicly disclosed price and depth of liquidity.
Order matching systems collect buy and sell orders without disclosing to the marketplace the price, quantity, or type in order to avoid impacting the price in the marketplace. As a consequence, numerous large orders can be entered into an order matching system without fear of degrading price performance. One disadvantage inherent in order matching systems is that orders may be committed to a destination that does not happen to attract the appropriate liquidity at the right moment, while liquidity is available at other destinations. Further, the increasing number of exchange destinations reduces the prospects of success in the search for liquidity.
One example of an order matching system is Instinet, owned by Reuters which operates an electronic trading system that allows parties to enter bids and offers electronically in an anonymous fashion as an alternative to the direct human-to-human negotiation of orders in the upstairs market or on the trading floors. Instinet subscribers can respond to an “order” entered into the system either by matching a displayed price or by making a counter bid or offer that is transmitted electronically to the counterparties. Instinet executes matches on a periodic basis, anywhere from several times a day to hourly, after which the order is cancelled or carried forward to the next match.
Another automated trading system is disclosed in U.S. Pat. No. 4,674,044 (Kalmus et al.), owned by Merrill Lynch. This system matches security buy/sell orders. Orders are qualified for execution by comparing the specifics of an order against predetermined stored parameters including the operative bid and asked prices, the amount of stock available for customer purchase or sale, and maximum single order size. Once qualified, the order is executed and the appropriate parameters updated.
The Optimark system owned by OptiMark Technologies, Inc. as described in U.S. Pat. No. 5,845,266 to Lupien et al. performs continuous matching by cycling through the order book every minute or two. This system allows participants to enter satisfaction density profiles for each order which can incorporate factors such as price, quantity, eligibility and urgency which can be associated with order satisfaction profiles as a whole or with each individual profile coordinate value.
The use of such automated systems within the financial instrument marketplace has increased the proliferation of liquidity destinations. This in turn has actually made the job of those responsible for executing transactions more labour intensive and time consuming as increased monitoring time is required to utilize these alternatives to the regular centralized exchanges. For example, traders are typically given a quantity and a price range in which they are expected to transact as well as a time frame in which to accomplish this. As a result, there is a tendency for traders to executing trades, while maintaining within the user imposed price and quantity ranges, at less desirable order prices and quantities as the user imposed deadline for trading approaches.
Accordingly, there is a need for a order matching system which efficiently manages orders for users between different liquidity destinations, which provides users with the ability to enter orders that reflect their specific order preferences over a wide set of market and external criteria, which allows users to specify in advance how order characteristics should be determined during the course of trading, and which minimizes the monitoring time requirements associated with the execution of order transactions.